Apr 23, 2013

Paying your staff the National Minimum Wage?

Is it enough?

The National Minimum Wage (NMW) came into force in April 1999.  It is a legal requirement set by government stating the minimum hourly rate that an employee must be paid.  This increases yearly in October and in 2012, for an employee over the age of 21 increased from £6.08 to £6.19 per hour.  This rate applies nationally and is set by the Chancellor of the Exchequer each year on the advice of the Low Pay Commission, enforceable by HM Revenue & Customs.   But have you heard of the Living Wage?  There has been a growing awareness in the press and in parliament with all political parties keen to show their support for the Living Wage.


So what is the living wage?

The Living Wage is a voluntary rate of pay designed and calculated to enable employees to afford a basic standard of living.  The Living Wage is calculated independently by the centre for Research in Social Policy at Loughborough University.  There is also a separate London Living wage which is set by the Greater London Authority and uses a different methodology from the Living Wage. 

The Living Wage increased in November 2012 from £7.20 to £7.45 per hour with The London Living Wage, which takes into consideration the additional costs for someone living in London, and increased from £8.30 to £8.55 per hour.


Impact on employees earning less that the Living Wage

A report commission by KPMG into the Living Wage found that 20% of all workers in the UK, nearly 5 million people are paid below the Living Wage.  The report looked at a number of factors and found that people earning below the Living Wage were more concerned about job security; were more pessimistic about the financial outlook; less inclined to make a major financial purchase; found it harder to access unsecured credit; were more likely to be in debt; struggled to save; and had less cash available to spend (showing a marked decline against those earning above the Living Wage).  Occupations most likely to be affected are sales and retail assistants; cleaners and domestic staff; kitchen and catering assistants; care assistants and home carers.

In 2005 cleaners at the House of Commons went on strike to demand pay rises to bring them in line with the living wage.  They achieved their aim in 2006.  And cleaners in the London Underground took similar action over two years with Transport for London finally conceding a deal based on the living wage in 2010.


London Living Allowance

It has long been recognised that living in London carries additional costs.  Many employers have provided a variety of London allowances, some national companies will have different allowances for inner and outer London, and some will have entirely separate pay scales such as teachers and some parts of the Civil Service for those working in the Capital. A 2012 survey by Industrial Relations Service (IRS) showed that 51% of employers pay a specific London allowance and a further 44% have higher basic rates of salary.

The biggest expense to living in London is accommodation.   In 2012 local authority rented property on average across the UK was £69.13 a week comparable to £89.17 in London, 29% higher than the UK average.  In the private sector the difference is even greater with the average rental in England being £705, compared to £1,312 a month in London, 87% higher.  The charity Shelter stated earlier this year that rental costs accounted for more than half of the average wages in two thirds of the capitals boroughs, with rents across the capital taking up to 59% of earnings.    

The London Living Wage has been set by the Greater London Authority (GLA) since 2004 and uses a different methodology to the Living wage.  It calculates a ‘poverty threshold wage’ and then adds a 15% margin for unforeseen events and thereby ensuring that recipients do not fall to the level of poverty wages. 


Why should employers consider this?

The KPMG report highlights the extent of low pay in Britain and makes a strong argument for employers to pay the Living Wage believing that it will not actually cost an employer much more as motivation and performance will improve coupled with lower rates of leavers and absenteeism which are often hidden costs for the smaller employer.

A further report carried out by Queen Mary, University of London on behalf of Trust for London found that 54% of employees felt more positive about their employment and 52% more loyal towards their employer after the Living Wage had been introduced into their workplaces.  The research further stated leaving rates fell by 25%; employers noted improvements in stability, attitudes and characteristics of their employees.


The future

For many employers the requirement to adopt the NMW was already a big challenge, however, there is concern about the growth of in-work poverty.  Research from the Joseph Rowntree Foundation, in November 2012, shows that in-work poverty now outstrips the levels of poverty in workless household for the first time.

Are employers achieving their competitive edge at their employee’s expense?  And possibly at the government’s expense as low wages are subsidised by the taxpayer through working family tax credit, housing benefit and other pay related benefits.  It will be interesting to see if the Universal Credit which will replace several existing benefits in a single welfare payment, achieves its intended aim to make sure that claimants are always better off in employment than out of work.

Or in these challenging market conditions is employment of any kind and at any cost what really matters.  According to analysis in 2012 by the Office of National Statistics since 2008 the combined effect of the recession, high unemployment, stagnating wage levels and high inflation has depressed annual income by 13% per head. 

One suggestion is that the Living Wage is not necessary if government acknowledged that the NMW became the amount that the state determines as the lowest pay threshold and therefore not taxed and that the tax-free personal threshold should be increased so that only people earning above the NMW pay Income tax and National Insurance.  

The task ahead for employers must be to balance the competitive needs of the business while ensuring their staff receives a fair days pay for a fair days work and to fully understand what constitutes a fair days pay... It might be morally right but is the Living Wage affordable?


Deidre Allen – Human Resources

Further information